The Effect of Firm Size on Capital Structure Decisions: An Application on BIST Manufacturing Sector Firms

Abstract

Trade-Off and Pecking Order Theories are two important theories that aim to explain capital structure decisions of firms. It is expected that the predictions of the Pecking Order Theory to be more valid in explaining the capital structure decisions of smaller firms. The factors that are thought to affect capital structure decisions are tested on the portfolios which are grouped according to the sizes of the firms. The aim of the study is to determine whether the results obtained from smaller portfolios comply more with the Pecking Order Theory. Beside, it is also determined that whether these effects are higher in smaller portfolios. Taking in to account the macroeconomic factors, the firms that are quoted in Borsa Istanbul over the period 2000-2007 are analysed using panel data analysis. The findings for smaller portfolios support the Pecking Order Theory while the findings for larger portfolios support both theories. The results that comply with the Pecking Order Theory are not heightened in smaller portfolios. The results of the macroeconomic factors vary with the firm size.